Geopolitical risks came to the forefront in markets in the beginning of the week after US-Iran tensions intensified . Despite calming down, the geopolitical tensions are set to remind us of a new world order. Financial markets were affected by the attacks but the initial market reaction was reversed in most areas. Equity markets are currently up 0.5% on the week. We believe markets will monitor the geopolitical situation in the next weeks but it is unlikely to become a significant market driver. Oil rose initially but is now below the pre-US-Iran tension level (USD65/bbl).
This week we received some decent figures globally confirming our view of a gradual recovery in the global growth outlook , although the German industrial production and export figures for November were still on the weak side (not boding well for euro area industry avoiding a third consecutive quarter of negative growth in Q4 19). See Euro Area Macro Monitor: Ending the year on mixed signals , 9 January.
In the euro area next week’s highlight is the ECB minutes (Thursday) and the final inflation details (Friday). The flash inflation figures already pointed to a strong reading of 1.3% on core inflation, but the finer details will indicate the robustness of the recent pickup in core inflation (1.3% both in November and December last year). The inflation details are important for the ECB’s assessment and the combination of a pickup in core inflation and reduced downside risks may lead the ECB to revisit the growth risk assessment, though probably not until March. The focus in the ECB minutes on Thursday will be on the framework of the strategic review.
In the US, inflation (Tuesday), retail sales (Thursday) and consumer confidence (Friday) are due for release. The latter two are the most important from an economic market perspective to gauge if the consumer spending spree continues. Retail sales are notoriously volatile and more difficult to gauge. The inflation figure, which has been hovering slightly below the 2% mark that the Fed targets, may not be a market driver as the Fed has signalled it is on hold for now.
Similarly, the UK monthly GDP figure (Monday) will shed light whether the Bank of England will ease or not in the near term , which is gaining increased attention as we are heading towards the 31 January Brexit date. Yesterday, BoE governor Carney said UK growth has slowed below potential and the MPC is debating the merits of near-term stimulus.
In China all eyes are on the signing of the phase one deal on 15 January in the White House and potential signals on phase two talks. Trump tweeted recently he will go to Beijing in the future and talk about phase two with Xi Jinping. In terms of Chinese data, Q4 GDP is released, which we expect to be unchanged from the previous quarter at 6.0%. It should lead to 6.15% growth for all of 2019 in line with our estimate (6.2%). Data on industrial production and retail sales will also give some info on the state of the economy. Both have improved a bit in recent months.
